The Bailout Is Over...Now It's Just Welfare For Fat Cats

As we said earlier today, the news that private banks and now even GMAC are lobbying for access to the Treasury Department’s rescue fund is the clearest demonstration so far that we’re paying too high a price for the equity stakes and dividends from participating companies. We’ve heard from readers since whose objection to our analysis is, basically, “Wait a minute! Isn’t overpaying the whole point? How else do you add new capital without wiping out creditors and shareholders?”

When it was a matter of recapitalizing troubled financial institutions whose failure arguably posed systemic risk to the financial system, it may have made sense to overpay for the preferred equity shares and trash assets held by banks. But the latest round of bailout requests is not being justified in terms of systemic risk. It’s rent seeking from financial firms who are claiming that the bailout privileged the big guys over the little guys. Or, in the case of the auto-industry, it’s just a flat out demand for a subsidy.

"The objective is to permit equal access and participation so there is not a bias toward any part of the banking industry," said Bob Davis, executive vice president of the bankers association.

Look. Of course the bailout was biased toward a part of the banking industry. It was supposed to be biased. The banks getting bailed out were too big to fail, or at least too “interconnected.” Now that might have been bullshit, as Anna Schwartz argues, but at least it had some internal logic. “Equal access” amounts to the argument that because some banks were deemed too big to fail, they all must be.

But, as the automakers are arguing, why should the bailout be biased toward the banking industry at all? Once the systemic risk justification is brushed off, why not subsidize the survival of any troubled company? It’s not too big to fail anymore, it’s just too politically connected to fail. The sight of these captains of industry desperately grasping for aid to fend of the fate the markets have consigned them might not be pretty, but what else did we expect when we started this thing?

As Snoop Dogg says in the classic Gin and Juice:

Now, that, I got me some seagrams ginEverybody got they cups, but they aint chipped inNow this types of shit, happens all the timeYou got to get yours but fool I gotta get mine

We’ll just end this with our favorite version of Snoop’s song, done bluegrass style by the Gourds.